As Stocks Hit New Highs, A Friendly Reminder
It’s the week before Memorial Day 2015, and U.S. stocks are hitting new all-time highs. So a lot of people are probably kicking themselves to the tune of: “Darn! I should have had more money in stocks!” If this is you, take heart by looking at this chart:
The above chart takes us back to the darkening days of October 2007, right before the 2008 financial crisis. Assume that going into the gut-wrenching plunge that followed, you had:
(1) $100,000 invested in all stocks (S&P 500 Stock Index shown in blue);
(2) Another $100,000 in 60% stocks/40% bonds (in orange); and
(3) Another $100,000 in 40% stocks/60% bonds (in burgundy).
Nearly eight years later — end of February 2015 — the returns are nearly the same for all three portfolios. But as you can see, the diversified portfolios (in orange and burgundy) lost a lot less ground during the crisis and rebounded far more quickly. The 40% stock/60% bond portfolio actually did better than the all-stock portfolio up until 2014.
This is a major reason we here at LNWM keep talking about the benefits of diversification. By not falling as much during the occasional scary drops in the market, a diversified portfolio is likely to make it easier for you to stay invested, get more stable cash flow and in this way come out ahead in the long run.
Happy Memorial Day Weekend!